At the end of September, Albanian banking system capitalization is 18.2% – Is this good?
The capital adequacy ratio for the Albanian banking system reached the record level of 18.2%, at the end of September. This indicator measures the ratio between the capital of the banking system and the value of assets, weighted by risk coefficients and type of investment. Capital adequacy is the most important indicator in the regulatory viewpoint, because it measures banks’ ability to cover investment risks with their capital. The relevant regulation of the Bank of Albania stipulates that this indicator should be at least 12%.
At present, the banking system in Albania is 50% higher than the regulatory requirements. The growth of this indicator is the result of several factors. In recent years, banks’ shareholders have applied frequent capital growth versus a challenging economic environment. But the most weighting factor in this development is slow lending performance. In absolute terms, the loan portfolio of the banking system is at the levels of seven years ago. Another factor that has further increased the capitalization of banks is the abolition this year of some of the regulatory measures that place banks at higher risk coefficients for foreign investment.
Such a high level of capitalization is positive in terms of security, but carries challenges for the future. A much higher capitalization than the regulatory requirements will result in unsatisfactory return rates for the banking system shareholders, making this investment less attractive. Therefore, this high level of capitalization exacerbates the need for credit growth for the private sector of the economy. Lending remains at a standstill, especially in the business segment, also due to the tight supply of banks.